Navient (NAVI) Q1 Earnings Lag on Lower Net Interest Income

Navient Corporation’s NAVI first-quarter 2017 adjusted core earnings per share (EPS) of 36 cents missed the Zacks Consensus Estimate of 43 cents. Also, the figure came below the year-ago quarter tally. The reported EPS for the quarter includes the effect of regulatory-related costs.

Core earnings excluded the impact of losses from the derivative accounting treatment. It also excluded the impact of certain other one-time items, including unrealized, mark-to-market gains /losses on derivatives, and goodwill and acquired intangible asset amortization and impairment.

Results of Navient reflect reduced net interest income. However, on a positive note, the company recorded a decline in expenses and lower provision for credit losses in the quarter.

Net income came in at $107 million in the first quarter, down from $147 million recorded in the prior-year quarter.

GAAP net income for the quarter was $188 million or 30 cents per share compared with $181 million or 53 cents per share in the year-ago quarter.

Prior to release of the results, Navient announced that it has entered into an agreement with JPMorgan Chase JPM to purchase an education loan portfolio worth $6.9 billion. The portfolio is said to comprise $3.7 billion in FFELP loan and $3.2 billion in private education loans. The deal is expected to be completed in the next quarter. Further, it is anticipated to be accretive to the company’s 2017 financial results.

Performance in Detail (on core earnings basis)

Net interest income declined 19.7% year over year to $334 million.

However, non-interest income inched up 2.8% year over year to $181 million. Asset recovery revenues rose, while servicing revenues declined.

Further, provision for credit losses decreased 3.6% year over year to $107 million.

Total expenses declined 3.6% year over year to $238 million.

Segment Performance

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $51 million, down 22.7% year over year. The underperformance was mainly attributable to lower net interest income owing to amortization of the portfolio and also a decrease in net interest margin (NIM), partially offset by a decline in operating expenses.

FFELP loan spread contracted 3 basis points (bps) year over year to 0.86%.

During the quarter, Navient acquired FFELP loans of $686 million. As of Mar 31, 2017, the company’s FFELP loans were at $85.3 billion, down 10.1% year over year.

Private Education Loans: The segment reported core earnings of $35 million, down 42.6% year over year. The decrease was due to lower net interest income owing to amortization of the portfolio and lower NIM, partially offset by reduced provision for loan losses.

Total delinquency rate came in at 6.8%, up 6 bps. Charge-off rate of 2.6% of average loans in repayment was 2 bps higher on a year-over-year basis. Student loan spread contracted 37 bps year over year to 3.33%.

As of Mar 31, 2017, the company’s private education loans totaled $22.6 billion, down 11.4% year over year.

Business Services: The segment reported core earnings of $77 million, up 2.7% year over year.

Currently, Navient services student loans for over 12 million customers. This includes 6.1 million customers on behalf of the U.S. Department of Education.

Other: The segment reported a net loss of $56 million compared with a net loss of $55 million in the prior-year quarter.

Source of Funding and Liquidity

In order to meet liquidity needs, Navient expects to utilize various sources, including cash and investment portfolio, issuance of additional unsecured debt, repayment of principal on unencumbered student loan assets and distributions from securitization trusts (including servicing fees). It may also issue term asset-backed securities (ABS).

During the reported quarter, Navient issued $1.9 billion in FFELP Loan ABS and $843 million in unsecured loan debt. Also, the company retired or repurchased $568 million of senior unsecured debt during the quarter.

Share Repurchase

During the quarter, Navient repurchased 7.4 million shares of common stock for $110 million.

Our Take

Navient’s first-quarter results are not impressive. The top-line continues to remain under pressure. However, we believe that the company will continue to maintain its leadership position in the student-lending market through various growth avenues, including its acquisition of loan portfolio from JPMorgan.

Additionally, the economic recovery and declining unemployment rate are likely to fortify its business prospects as well as help borrowers in repaying their loans. Further, we remain encouraged by the company’s steady capital deployment activities.

Among other firms in the finance space, Ally Financial Inc. ALLY is slated to release results on Apr 27 while Trustmark Corp. TRMK will release its earnings on Apr 25.

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